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Fed To Cease Reducing It's Securities Portfolio

  //business-finance.news-articles.net/content/202 .. to-cease-reducing-it-s-securities-portfolio.html
  Published in Business and Finance on Wednesday, October 29th 2025 at 16:20 GMT by Seeking Alpha
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Background: The Fed’s Massive Balance‑Sheet Expansion

During the COVID‑19 crisis, the Fed launched a series of quantitative easing (QE) programs, buying large quantities of Treasuries and mortgage‑backed securities (MBS) to keep borrowing costs low and support the economy. By the end of 2021, its balance sheet swelled to a record size, and the Fed’s holdings of Treasuries and MBS grew to over $5.7 trillion. The goal of the Fed’s “balance‑sheet normalization” is to gradually reduce these holdings to pre‑pandemic levels, a process that can affect liquidity, bond yields, and the broader financial system.

The Reduction Cycle and Its Pause

Since the policy shift in August 2022, the Fed has been systematically cutting its securities portfolio by roughly $50 billion per month, a pace that, if continued, would cut the balance sheet by about $800 billion annually. The policy was meant to be “steady, not rapid.” However, the pace of cuts has slowed, and market participants have begun to notice that the Fed’s portfolio is shrinking at a slower rate than expected. The Seeking Alpha article points out that the Fed’s “balance‑sheet reduction” schedule was “more aggressive than the market had anticipated.”

The decision to pause reductions comes after the Fed’s latest open‑market operations data showed that Treasury auctions are keeping the Fed’s Treasury holdings from falling as quickly as intended. In late 2024, the Treasury’s monthly auction volumes were among the highest in recent history, adding new securities into the Fed’s portfolio and offsetting the Fed’s selling of its holdings. Because the Fed’s balance sheet has a built‑in “buffer” of high‑quality securities, the central bank is now choosing to maintain its current size rather than risk tightening market liquidity.

Why the Fed Decided to Halt the Unwinding

The article highlights several factors that contributed to the Fed’s decision:

1. Inflation Persistence – While headline inflation has moderated somewhat, underlying inflationary pressures remain. The Fed has signaled that it remains “highly concerned” about a prolonged period of above‑target inflation, and reducing its holdings could exacerbate upward pressure on yields, potentially slowing the economy.

2. Liquidity Management – The Fed’s large holdings serve as a liquidity buffer. By maintaining a sizable stock of Treasuries and MBS, the Fed can conduct open‑market operations more efficiently and stabilize short‑term interest rates. The article notes that a rapid decline in holdings could have unintended side effects, such as widening the bid‑ask spreads in the Treasury market.

3. Policy Signaling – The Fed has used its balance‑sheet management to signal its stance on future monetary policy. By pausing reductions, the Fed signals that it remains cautious about tightening policy too aggressively, especially in the context of an uncertain economic outlook.

4. Economic Recovery Outlook – The Fed’s own projections indicate that the labor market remains robust, and the economy is gradually returning to pre‑pandemic levels of activity. A pause in portfolio shrinkage is seen as a prudent way to support continued economic resilience while avoiding a potential shock to markets.

Implications for Markets and Investors

The Fed’s decision is expected to have a muted but clear impact on the fixed‑income market. Treasury yields may remain relatively stable as the supply of new Treasury securities continues to absorb the Fed’s holdings. Bond traders, meanwhile, will need to adjust expectations regarding future liquidity conditions.

The article points out that MBS investors, who had previously benefited from the Fed’s large purchases, might see a gradual normalization of MBS spreads. However, since the Fed will maintain its holdings, there will be a continued demand for MBS that can keep spreads moderate.

For equity markets, the Fed’s pause may translate into lower short‑term borrowing costs, potentially supporting corporate earnings and dividend growth. Conversely, if inflation remains persistent, equity valuations could be pressured by expectations of tighter monetary policy in the future.

Conclusion

In short, the Federal Reserve has elected to cease the systematic reduction of its securities portfolio at a time when inflation remains a concern, Treasury auctions continue to add liquidity to its holdings, and the economy is still navigating a path toward a durable recovery. By halting further cuts, the Fed aims to preserve market liquidity, manage inflation risk, and maintain a stable monetary environment. The decision reflects a broader shift toward a more measured approach to balance‑sheet normalization, aligning with the central bank’s overarching mandate of ensuring maximum employment and price stability in a complex post‑pandemic economy.